Thursday, March 26, 2009

Here's What I Don't Understand

Let's say my wife and I are deeply in debt. So, to brighten our financial outlook, we begin to borrow like crazy AND all sorts of people lend us money. We take out ten credit cards and max out each credit line. Next, we get 10 bank loans and we quickly spend all the money on upgrading our home plus we take some courses at the local college to improve our employment skills. Next, we hit up all our friends and family members for money -- they throw thousands of dollars at us.

Would most people think our actions were prudent and based on sound financial principles?

My guess is that the answer would be no. I would think that most people would suggest that we were settings ourselves up to go bankrupt or worse. Yet, this is the kind of tact our government is taking to try to steer the country out of the throes of the current economic debacle.

I find myself today in uncharted territory -- I happen to agree with many conservatives! I can't remember a time in my adult life when this has happened.

I'll be the first to admit that I'm no economic guru. I have only a vague idea of what the Dow Jones Industrial Average is and what it's suppose to mean. I earned a paltry D in college economics class. So, I'm not suggesting I have the firmest grasp on micro or macro economic policy.

That said, the strategy the Obama administration has decided to pursue simply seems strange to me. My biggest worry is that sometime in the not-so-distant future the bill for all this spending will come due. What will happen if we're not that much better off than we are now? What will happen to our economy if we don't have the requisite funds to pay back all this borrowed money? What if China, who holds a significant portion of our treasury notes, calls in their loans?

We've already seen what happens to mega corporations when this occurs; they get a government bailout. But who does the government itself turn to when the balance sheet is seriously out of whack?

3 comments:

  1. I am almost equally dismayed at the actions our government has taken to deal with this financial crisis. The prospect of our tax money going to pay for CEO bonuses sickens me.

    But at the same time, something has to be done. I've heard some people say on the news that perhaps we should let the bigger financial companies bite the dust and instead protect homeowners and workers. The latter needs to be done, but because these banking, insurance, and finance companies are such an integral part of our economy, having them fail would be a bad idea.

    We are already seeing the ripple effect from the failures and restructurings and takeovers of these companies by other companies; the credit market has seized up, and little credit is moving to consumers or to small and medium-sized businesses, which are the lifeblood of the American economy.

    There is no good solution; there are only less bad ones. Because of the nature of a capitalist economy, the business owners and the very wealthy are not going to suffer, and I think that's what we're all so upset over. Most people are feeling the pinch, and it sickens me to no end that these failing enterprises are going to get propped up for another year or two.

    Some people have said that we live in one world and are all inter-connected - well, the global economy is in a sense a realization of that insight. Though it's probably not the one we expected - a community of anxiety and suffering.

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  2. While the economy as a whole is quite complex the situation we find ourselves in is pretty simple. approximately 70% of the GDP is driven by consumer spending on everything from cars to peanut butter. This spending drives the economy in the form of jobs in manufacturing, service, retail and even government. Because of the credit crisis and and the resulting downturn in spending by the regular guy on the street the spending engine is not doing what it normally does and the economy slows even further. The only current source of spending is the government. Yes, deficit spending is bad but to continue to allow the economy to slow and face the real possibility of a true deflationary spiral is not an option. We have to spend to stimulate the economy now and hope it revives enough to allow us to reduce some of the deficit going forward. My only fear is that we are not spending enough and this is a fear shared by many including two Nobel winning economists J.Stiglitz and Paul Krugman. FDR showed how in an economy such as ours the only answer is found in Keynes.

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  3. Thanks for your comments. It's a difficult and complicated situation, to be sure!

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